But of all the consequences of central banking and fiat money, war is the worst because it exacts the biggest price from citizens and foreigners and everyone else caught in the crossfire. That is why sound money — by which I mean the gold standard — is a key to peace and freedom.

I really despise this kind of gold bug rhetoric because it damages the true story of gold by destroying the credibility of the gold community in the eyes of everyone else. This concept that fiat produces wars is almost axiomatic within the gold community. It is used as a powerful argument for the return to gold money. But what if this gold bug axiom is actually a fallacy? What if it is simply wrong? How much effort has been wasted over the years? How much credibility lost? Here is Randy Strauss (aka TownCrier) on the subject:

TownCrier (8/4/06; 13:14:41MT - usagold.com msg#: 146358) taking a HARDER look at fiat and warAttractive as it would be to simply take Rockwell at his word regarding his association between the making of fiat money and the making of war (essentially saying that war could be abolished if fiat currency were abolished), history begs us to identify that notion as a utopian falsehood. Two handy examples from very close to home (in space and time) provide the necessary instruction on this point.1) We launched into the U.S. Civil War despite our being on a bi-metallic (gold and silver) currency system.2) We launched into World War I despite many of the participants being on a gold standard.Sure, paper greenbacks and confederate currency came along to prominence in the Civil War, as did the abandonment of the gold standard and implementation of fiat currency in WWI, but this development misses a most important point.That point being, if the metallic monetary standard fails to prevent the war in the first place, then all subsequent arguments about the nature of money go out the window. Because once a nation deems itself engaged in a struggle for its very survival, there is no power on Earth that can compel such a nation to cling fast to its metallic currency standard if the legislators deem that a fiat currency would be expedient to facilitate the war effort.Here's the bottom line on it: In the very thick of it, the scale and scope of a nation's participation in war is not limited by the extent of the metal or paper fabric of a nation's currency, but rather by the extent of that nation's real resources. Throughout the affair, the role of money (whether in the form of gold currency or paper) is merely an accounting mechanism that the nation uses in the economic mobilization of its resources and production.And as it all shakes out, the wealth of a nation in PEACETIME is ALSO determined in very much the same way -- upon the extent of its resources and the efficiency of its production and mobilization of capital. And the role of money is to help organize and lubricate the workings of the economy. To be sure, any gold metal within a nation is counted among the nation's total stock of resources, and very obviously, it need not (and ought not) any more than any other physical resource be enmeshed (underutilized) in the physical makeup of the nation's currency/banking system.Given the structure of fractional reserve lending as the basis of our monetary system, the cold hard truth is that use of metallic (gold) currency propagates a nasty falsehood -- the coins are just a subset of the entire money supply but it nevertheless causes ill-informed participants to wrongly believe that the entire money supply is "as good as gold".It is Another cold hard truth for some people to swallow, but in light of the preceding paragraph, the use of a fiat (paper) currency system is a much more honest means to represent the intangible "nothingness" -- the appropriate embodiment of the network of accounting which is the actual basis of a monetary system. Clearly, the conclusion to be had from all of this is that a nation's monetary/currency system does not represent the wealth of that nation. Money is merely a utility to be used, to be borrowed and spent. Again, think of it solely as a mobilizing lubricant within an economy -- it has value while in use, but none otherwise. The wealth of a nation, and of its people, is not in its artificial money, but rather in its various resources which can be mobilized for both local and international deployment. It makes little sense to "save" money, as money is an ethereal utility which can be mismanaged and hyperinflated into dysfunction.Because of this difficult truth, "Your wealth is not what your money say it is," as Another used to say. Instead, your wealth, properly measured, is the tangibles you've accumulated, the store of resources you've saved. And among the world of tangibles, gold is globally the most liquid -- the most universally recognized, honored, and accepted.In time of war, governments may (and history has shown they often do) recognize and declare that gold is too valuable to be wasted underutilized (undervalued) in the representational coinage of national currency. Therefore, fiat currency is adopted, and gold is instead mobilized in its fully-valued form -- a tangible resource uniquely and reliably suitable for any and all international settlements.Blunt summary:Our monetary system, in an attempt to be HONEST, chooses mere digits and PAPER as its representational currency. And consequently, in an effort to act WISELY, we unabashedly use this currency for immediate transactions, whereas we SAVE for our livelihoods by acquiring GOLD.R.

Now that's an interesting concept. Fiat is actually more honest than a gold standard. Perhaps I could write a few words about it. Oh, wait. That's right, I already did.

There's a promising trend developing today. More and more of the West's intelligentsia are speaking openly and positively about a 'gold' reference/standard/focus. Here is James Grant, publisher of Grant's Interest Rate Observer on Bloomberg TV last week:

From the video:

Carol Massar: Okay, but do you really think anybody is going to adopt [a gold standard], Jim?James Grant: Carol, in Brooklyn we have a saying: This is not a threat, this is not a promise, it's gonna happen. […] We have a credit card, and a gold standard would be our debit card! That's what we need. Carol Massar: I love that idea, that you say we need a debit card.

I love it too! But how about if the gold becomes Mises' "secondary medium of exchange"? Meaning it floats against, and must be exchanged for, the primary medium of exchange (fiat) before it can be spent. Then the US debit card will debit from America's WEALTH which will float in VALUE until that time at which it must be spent to fill the hole left by the trade deficit.

In essence, we'd be accounting for our gold, our ASSET backing our debit card in its VALUE rather than its VOLUME. Doesn't this make more sense than foolishly trying to control (fix) the value just so we can use volume as our accounting method? Talk about shooting ourselves in the foot.

Notice that I called the US gold an ASSET. That's what it is, ever since Nixon severed its link to fiat, just like Treasury bills. Assets are Mises' "secondary media of exchange".

Mises: One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them—in a roundabout way—for paying or for increasing cash holdings.

Claims employed as secondary media of exchange have, because of this employment, a broader market and a higher price. The outcome of this is that they yield lower interest than claims of the same kind which are not fit to serve as secondary media of exchange. Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose.

Even Bernanke agrees:

So if gold is an ASSET and not money, as even Bernanke states, why are we the only ones still accounting for it by VOLUME rather than VALUE? When gold was money, and it was fixed in value to the dollar, it made sense to account for gold in VOLUME, because the value never (rarely) changed. But after 1971, that link was severed and gold began to float. Today, as Bernanke says, gold is an asset. Should it not be accounted for by VALUE now rather than VOLUME?

So each quarter, as the Eurosystem has its Mark to Market-valuation party, the US Treasury has its Mark to Volume party. And actually, the Treasury busybodies do it every month! But Treasury is only recording any tiny changes in the VOLUME of the US gold, just like when it was money. The value hasn't been changed in 40 freakin' years! And in fact, the volume hasn't changed either! Here are the monthly back reports going back 2.5 years. A special prize goes to anyone who can spot a single change anywhere in these 30 monthly reports. Yet as crazy as this sounds (US gold still valued at $42.2222/oz.), there is historical precedence for this antiquated system of asset valuation.

As I pointed out in Euro Gold, the 1993 IMF guidelines for central bank MONETARY GOLD valuation states, "Monetary gold transactions are valued at the market prices underlying the transactions." (Section 444) In other words, mark them at the initial purchase price. Yet the IMF does in fact distinguish between "Monetary Gold" and "Gold held as a store of value" believe it or not (see "Gold" in the index). And for "Gold held as a store of value", as for all assets relevant to the Balance of Payments (balancing trade imbalances), the IMF recommends continuous revaluation to market prices:

Valuation of Stocks of Assets and Liabilities107. In principle, all asset and liability stockscomprising a country’s international investment positionshould be measured at market prices. This conceptassumes that such stocks are continuously (regularly)
revalued—for example, by reference to actual marketprices for financial assets such as shares and bonds or,in the case of direct investment, by reference toenterprise balance sheets.202. Nonmonetary gold covers exports and imports ofall gold not held as reserve assets (monetary gold) bythe authorities. Nonmonetary gold is treated as anyother commodity and, when feasible, is subdivided intogold held as a store of value and other (industrial) gold.438. Monetary gold is gold owned by the authorities(or by others who are subject to the effective control ofthe authorities) and held as a reserve asset.10 Other gold(nonmonetary gold, possibly including commercialstocks held for trading purposes by authorities whoalso own monetary gold) owned by any entity istreated in this Manual as any other commodity. Transactionsin monetary gold occur only between monetaryauthorities and their counterparts in other economies orbetween monetary authorities and internationalmonetary organizations. Like SDRs (see paragraph 440),monetary gold is a reserve asset for which there is nooutstanding financial liability.

So which is it? Is the US gold a monetary or a non-monetary asset? Ben says it is not money. In fact, he was careful to call it a FINANCIAL asset, which he also called US Treasuries. So if that's his lexicon, I agree. But I do think that gold is probably the most credible ASSET available today, primarily because it doesn't involve an outstanding counterparty liability. In which case even the IMF appears to recommend regular MTM revaluation.

You know, this happened once before. In 1997 the German Bundesbank was valuing its gold under an even more conservative principle than the US, called Niederstwertprinzip. The principle of Niederstwertprinzip means you value your assets at the lower of two possible prices, the purchase price or the market price, whichever is lower at revaluation time. In other words, you record unrealized losses but never the gains. This is a highly prudent and conservative method of valuing one's assets. They would value their liabilities the opposite way, at the highest possible value. But in practice, this was an overly conservative method of valuing an asset whose price had appreciated over many decades.

And so, in line with modern best practices of accounting, the EMI (European Monetary Institute), forerunner of the ECB, announced in April 1997 that the Eurosystem would base its asset values on market valuation rather than the antiquated German system of Niederstwertprinzip. What this meant for Germany was that it had until launch day, January 1, 1999, to revalue its gold or else the financial gain from revaluing its gold contribution to the ECB would be formulaically distributed throughout the Eurosystem, rather than going entirely to Germany.

In the run up to launch day, politicians all over Europe were struggling to meet the Maastricht criteria of a budget deficit of no more than 3.0% of GDP, and total public debt of no more than 60% of GDP, by the end of 1997. This included Germany. And in 1997 Germany was also struggling with its highest unemployment rate since the Great Depression, 12.2%. And so, without being able to grow its GDP in 1997, this left only two options for getting the budget deficit down from 4.0% in 1996 to 3.0% in 1997; either raising taxes or cutting spending.

But that year, the political right successfully blocked all efforts to raise taxes while the left blocked the proposed spending cuts. Is any of this sounding familiar? It's what we call "between a rock and a hard place!"

So anyway, everyone wanting into the EMU had two targets to hit. 60% total debt and 3.0% deficit. And in early 1997, after the Dutch and the Belgians sold some gold to help hit their targets, it was ruled that the proceeds from official gold SALES could not be used to offset budget deficits but could be used to pay down the debt. This ruling left open an interesting technical option for Germany.

Since Germany would only be revaluing its gold reserves and not selling them, it could virtually erase the budget deficit it was facing in 1997 rather than running into an embarrassing breach of the Maastricht criteria in the critical year. For the politicians, the formulation of this revaluation plan was a godsend. And it was completely within their constitutional power to implement. The only necessity was changing a law governing the Bundesbank a little earlier than necessary, yet a law that would have to be changed before launch day anyway. You see, unlike in the US where the gold is owned by the government, not the Fed, in Germany the gold is actually owned by its central bank.

But the Bundesbank (Germany's CB), with its legendary reputation for fierce independence from politicians, did not want to be viewed publicly as having assisted these politicians to resolve a fiscal challenge (their problem) through a change in monetary policy (the Bundesbank's solemn responsibility). So when, on May 14, 1997, this plan was leaked to the press, the problems began. It was in the shadow of this uncomfortable leak that German Finance Minister Theo Waigel offered the following plea:

These reserves represent the success of the German national economy over the last 50 years. It is a savings which we have amassed from abroad. It was indisputably proper that the Bundesbank valued gold and foreign reserves with extreme caution over the last 50 years. … The new valuation will proceed with all necessary caution. The financial respectability of the Bundesbank will be guaranteed. Precautions against currency risks and the volume of the gold reserves will remain untouched. Not one ounce will be sold. It follows that not one ounce will finance the budget… It is both proper and inexpensive to use this 'ancestral credit' to wipe out our historic liabilities.

Unfortunately for the politicians, this public statement came across as pure desperation. The government denied that it was panicking and claimed the gold revaluation was simply one small part of a much broader plan to fix the budget problem. But, in fact, the gold revaluation would have made up for the entire budget shortfall all on its own! And having this debate go public threatened to undermine the credibility of the new ECB right out of the gate because the ECB's credibility rested on 50 years of Bundesbank credibility as a currency manager and defender.

The Bundesbank Governing Council, flexing its legendary independence, ultimately blocked the effort to use the necessary gold revaluation to bail the politicians out of their fiscal crisis. On May 28, 1997, following its Council meeting, the Bundesbank issued a press release agreeing to the revaluation of the gold before launch day, but rejecting immediate revaluation for the 1997 fiscal year, calling it "an infringement of the Bundesbank's independence."

The politicians fought back in the court of public opinion, but this conflict between politicians in charge of fiscal operations and a central bank in charge of only monetary operations hung a cloud of doubt over the timely launch of the euro. This endangered the exchange rate stability the politicians were counting on leading up to euro launch day. And this connundrum left the political push for EMU in an awkward position.

You can read the whole story here, but in the end, facing the damage that the public confrontation had done to the international credibility of German finances and to the reputation of the Bundesbank, the German Finance Minister (equivalent of the US Treasury Secretary) and the President of the Bundesbank (equivalent of the Fed Chairman) agreed to a compromise. The agreement was that the gold would be revalued in 1997 but that the distribution of any gains would not take place until 1998. The government would not be able to use the gains to offset budget deficits during the crucial year. The politicians would still have to fix the budget.

The agreement was reached in June of 1997 and the German gold was revalued. The Bundesbank's working capital was automatically increased and a portion of the proceeds went into a currency volatility fund (like Treasury's ESF) to deal with any repercussions of the revaluation. The distribution to the government's Fund for Redemption of Historic Liabilities would not take place until 1998. That was the deal. And ironically, even without the help of these funds, by the end of 1997 Germany met the Maastricht criteria with a deficit to GDP ratio of 2.9%.

Now I don't know if there are any lessons in this story that are particularly relevant to President Obama and his current, very public (and credibility damaging) budget confrontation. There are many obvious parallels as well as some clear differences. And one of the most glaring differences is that the US gold is not owned or controlled by the US central bank like the German gold, but it is instead in the custody of the US Treasury, which is part of the Executive Branch of which Obama is the chief executive.

Part of what led to this scheme to revalue Germany's gold at a key point in budget negotiations was that Germany's Niederstwertprinzip valuation policy left its gold beneath the level that 11 out of its 13 EU partners valued theirs:

Click image to enlarge:

Notice that the book value of Germany's gold in 1996 was only 27% of its market value at that time. Only Sweden had a lower valuation at 15%. So where would the US fit into this chart?

In 1996 the US was even lower than Sweden at 12%, but today our gold sits idly by at 2.6% of its market value.

Now even though a few of you went to excellent elementary schools, I'm sure that some of you have forgotten how the American budget process actually works. I know for a fact that some really smart people think Congress makes the budget. Here's a very brief refresher courtesy of Wikipedia:

The United States federal budget is prepared by the Office of Management and Budget (Executive Branch), and then submitted by the President to Congress for consideration. Invariably, Congress makes many and substantial changes. Nearly all American states are required to have balanced budgets, but the federal government is allowed to run deficits. The Office of Management and Budget (OMB) is a Cabinet-level office, and is the largest office within the Executive Office of the President of the United States (EOP).

It should be fairly obvious since I'm quoting Wikipedia that I am no expert in the US budgetary process, but even I can see that there are a few options that have never been explored or considered. And these are options for employing America's historical wealth, hidden in gold all these years, in defense of the credibility of her modern finances and the reputation of her currency. Instead of constantly trashing the currency and destroying credibility, it seems to me that there may be a few options and opportunities for Obama to step out and go down as one of the great statesmen in American history (but don't hold your breath).

I have brought up similar ideas in the past, so I'm not going to waste time repeating myself here. Instead, I thought why not come up with a fresh idea that would really shake things up? Why not figure out something that Obama could do right now, on national TV, that would definitely make it into the history books, something that would finally earn him that peace prize? So here's what I came up with:

Then Obama announces that he has instructed Treasury to audit the gold and then act as market maker to determine the US$ price required to balance the USG balance sheet and thereafter to maintain a free market in gold. He goes on to say that all taxes and any remaining restrictions on gold ownership will be removed to ensure the efficiency of this important new balancing mechanism.

Obama explains that through this process Congress will get a clean balance sheet and the American people will have an independent benchmark on the value of the US dollar every day. In effect, he will have hit the reset button and given the USA a fresh start.

From here he returns to his opening remarks about debit cards versus credit cards. He explains that for the last 40 years America has been maxing out one credit card after another, building the most powerful nation the planet has ever seen… on credit. But now that credit card will have competition from the new US debit card. We'll let our debit card compete with our credit card. If the world wants our gold more than our debt, they will pay the price that balances our books.

And as they bid up the price of gold, the balance in our debit account will grow, it won't shrink, because it is funded with a financial asset (as Ben Bernanke called it), a secondary medium of exchange (as Mises called it) that from here on out will be accounted for in VALUE not VOLUME. We still have more gold than any other single nation in the world, he'll remind the audience. And if they want it, they'll pay the price that balances our trade with the outside world.

At some price the gold will reverse our international trade deficit, and then our debt will become the better bargain. You can forget credit ratings. We'll have competition between our debt and our equity, our credit card and our debit card. Global trade will finally balance in physical goods and services because the price and flow of physical gold will make it so. The simplest answer ever. One for the history books.

Turning to Gold for the Answers

The more our mainstream intelligentsia turn to gold for answers, the more they look to the gold community for direction. And what they find there is all this nonsense about returning to one of the gold standards of yesteryear. Is that really where we are headed?

Gary North didn't think so in 2003. In one of my favorite articles by him, The Myth of the Gold Standard, North calls "the ideal of the gold standard" "one of the movement's least understood and most futile political causes." He goes on to explain how proponents of the gold standard unwittingly "defend big government in the name of limited government. And, just like almost everything else in the conservative movement, it eventually backfires. It backfires for the same reason the other conservative programs backfire whenever inaugurated: it calls on the State to limit the State.""The next time you hear someone waxing eloquent — and, in all likelihood, incoherent — about the marvels of the gold standard, ask him this: 'Why don't you trust the free market?' This question is intended to elicit what I like to call a jude awakening. "Be prepared for a blank stare, followed by 'Huh?'" "A gold standard is a promise made by a self-licensed professional counterfeiter that he will always stand ready to redeem his pieces of paper and official digits in exchange for gold at a fixed ratio. As the mid-1950's comedian George Gobel used to say, 'Suuuuuuure he will.'"

Do you see the difference here? It's the difference between what I'm talking about and what Mish and others are talking about. Mish wants the government to affix the price of gold (fix, control, read: government price control) to its currency preventing gold from floating. They don't trust the free market. They want government control. They are unwittingly asking for big government. I on the other hand want the market to choose the price of gold from day to day, the price that is necessary to resolve the global trade imbalances and set us back on a sustainable course.

More North:

"The gold standard became universal in the nineteenth century. Because the public had the right of redemption for a century, 1815 to 1914, the price level remained relatively stable for a century. This right of gold redemption was invariably suspended during major wars, but it was restored a few years after the war ended…"The nineteenth century was the first stage of an international sting operation. As in the case of every con game, the con man must create a sense of trust on the part of his mark. Whether it is a Ponzi scheme or a more traditional scam, if the targeted sucker distrusts the con artist, he won't surrender his money. For the con game to work, the con man must create an illusion of reliability. In short, he must present himself, economically speaking, as if he were 'as good as gold.'"The era of limited government led to enormous economic expansion. It also led to the mass production of high-tech weapons. Governments had to get their hands on these weapons in order to defeat other governments. There were few Third World nations in 1885 that could afford fifteen minutes of ammo for a Maxim machine gun. The big governments, in the words of nineteenth-century New York City politician George Washington Plunkett, 'seen their opportunities and took them.' The age of modern empires began in earnest."The bigger the world's economy got, the bigger the national governments got. The bigger the national governments got, the more they jostled with each other for supremacy. By 1914, they were ready for mass destruction on an unprecedented scale."World War I began with the suspension of gold payments by the commercial banks. This was the violation of contract — a lie from the beginning — that fractionally reserved banks would redeem bank notes and accounts at any time for gold coins. As soon as the governments all retroactively validated this violation of contract by commercial banks, they used their central banks to extract the gold from the commercial banks. They have yet to give it back…"There are conservatives who still present this 2,700 year-old con job of State-issued honest money as a philosophy of limited government. Whenever I hear this assertion, I always hear the faint sound of a piano playing Scott Joplin's "The Entertainer." My mind becomes clouded by an image of Paul Newman and Robert Redford, arm in arm, walking away with my gold. Fade to black."

So… does fiat produce an endless sea of wars? Perhaps it is gold standards that produce wars! After all, as both Randy Strauss and Gary North pointed out, we were on a bi-metallic standard at the beginning of the Civil War, and a gold standard at the beginning of WWI, a gold exchange standard at the beginning of WWII, and I'll add the French Revolution into the mix as well. And don't forget Jim Rickards' words from my post Greece is the Word:

"…this is taken much more seriously by the Europeans. I mean you go all the way back to the Counter-Reformation in the late 16th century which was extremely bloody. And then the Thirty Years' War which was devastating. And then the Seven Years' War and the Napoleonic Wars, the Franco-Prussian War, World War One, World War Two... this is one catastrophe after another! And Europe literally destroyed itself and exhausted itself in fighting all these wars. And finally after WWII they said enough! We're going to pursue unification. It's the only way to keep from fighting each other.Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank."

How many of those wars were produced by easy (fiat) money? Perhaps this one? But of course this is not my stance.

Gold standards don't cause wars any more than fiat causes wars. If any flaw in our monetary plane has a causal relationship with war in the physical plane, it is not the ease or hardness of the chosen money. It is the proclivity of our systems, whatever side is running them at the time, to fail to acknowledge and address the needs of two distinct groups, the debtors and the savers. Money is naturally bipolar for this very need. So how strange is it that no one has ever noticed?

FOFOA's dilemma applies to both fiat and gold standards. Here it is:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

Mish ends his short piece with this: "All fiat currencies including the US dollar are doomed. The only debate is the path it takes to get there." I guess this calls into question Mish's definition of doomed. If, by "doomed", he means the present purchasing power of the dollar is doomed, well then that's a bingo. But if by doomed he means we won't be using dollars as the medium of exchange in the future, guess again.

You can read about this concept at great length in my post The Return to Honest Money, but for now I'll end this post with a few relevant comments from FOA:

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function along side whatever major reserve currency is in vogue. Today, the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as it's currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money. Also:The prestige that we have the largest military force in the world does not help our money problem. We talk as if we will let any country die that does not use our money or support our currency. I point out that the British also made such comments and it didn't stop their downfall. Nor the Russians. Also:I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar places the good use of these attributes in peril. Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place your issues up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert. Also:NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not it's currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over-valued dollar that we spent without the pain of work.

And later:

Won't happen! Plan on Americans using inflating dollars as their local transactional currency and Euros as their second currency.

And again:

Of course I own dollars and will likely keep using them right thru any super inflation. I never expect the dollar to disappear.

And:

Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha!

I find the concept of currency causing wars to be along the same line as handguns spontaneously killing people.

Gold - it seems to function as means of exchange when all other reasonable options have exhausted, otherwise it remains a store of value, no? Solid sunshine for when times aren't so sunny; the "rainy day" asset.

What do you think is the Occam's Razor explanation for why they aren't revaluing gold?

a) there is no gold after all, or much less of it, so they can't revalue something they don't haveb) if they read your post their "western mind" wouldn't have the slightest idea what you were talking aboutc) there is some unintended consequence(s) they are concerned about, such as a complete annihalationfor the USD purchasing power - implying very high price of oil and very bad stagflationd) ?

I think door C, but it could be any combination of reasons. Let's just hope it's not (a).

Thanks for the article, FOFOA. I've been enjoying my learning and mind expansion so far. I've always thought the argument that fiat causes wars was silly, first ran into in Creature from Jekyll Island. I'm pretty sure it was that book that claimed the Napoleonic Wars was because the bankers were upset Napoleon went to the gold standard. Power is the corrupter.

It was my understanding that Bankers and Politicians alike have the most to lose from a FG scenario? As obvious as class warfare is right now, they would be willingly throwing that away - along with the subtlety of the inflation tax. Maybe its my cynicism, but I can't see any politician doing something that would directly harm themselves.

In recent posts, you seem to be pushing for an elected leader to revalue the gold. Do you view this as likely, or still think that the ultimate revaluation will come from the people?

As an aside, with the partisan politics at a ridiculous level, how many Rs would go crazy about this saying it was to benefit his party or some such nonsense.

There is something about the revaluing of gold reserves that I obviously don't understand. Let's say the US revalues its 8134 metric tons of gold at the current market price. That would be about $418 billion. So...what then? That kind of money would last the Treasury about 3 months at the current burn rate.

its not revaluing to the current value, its revaluing to what the free market (in this case what countries running trade surpluses) would value getting an asset (gold) as opposed to a claim (dollars) in return. Since we run a large USD denominated deficit, there would be multiple bidders on gold, increasing the market value considerably. Sure dollars will still be accepted in enough quantity to purchase other goods, but gold would be to actually preserve the 'surplus wealth' that they are producing.

You said "its not revaluing to the current value, its revaluing to what the free market..."

But isn't $1600/ounce more or less what the free market has set, at least for now? I heard that there are forces at work that manipulate the price of gold down. So you manage to remove those manipulative forces and the price of gold goes to...what? $3000? $5000? Even at $5000/ounce, that would be $1.3 trillion, less than one year in terms of budget deficit.

The "free market" is not so free. Gold traded through the exchanges are merely paper contracts. How many of these exist in relation to the claims on physical? The manipulation isn't about how much money is spent to control the price, the manipulation keeps those who think they have gold from taking delivery. But all they are getting is another paper claim (same as what the USD is).

I'm sure you have read many times that eventually the paper and physical market will diverge, what does this mean to you? Price only matters currency to currency, value is something else entirely. When you try to price gold, you will skewed by your history of using the USD as your unit of account. You've only known gold to buy you what has been set forth since the industrial revolution. Is it not strange to you that through the extreme growth of worldwide population, advances in technology, etc. that gold purchases less? To put into perspective, there are an estimated 5 billion ounces every produced in the world (almost all of which still exists). With 6.6 billion people, thats 3/4 ounce for every person. Total currencies that FOFOA uses quite frequently (non derivative) is $60 trillion, or $9100 per person. With derivatives it approaches $50k per person. But still, gold cannot be printed, so it has value above these prices still.

Revaluing gold to settle claims means that we will be selling the US stock of gold. Do you think we have held gold all this time to freely give it away at $5000 an ounce in current money? Like you said, that doesn't even make a dent in our debt, yet we lose all of our nation's gold. What is a likely number per ounce that would let us keep a sizeable amount of gold while eliminating all debt? Part of a free market is the seller agreeing to sell at any given price.

We are at an incredible time in history. Gold is freely available to anyone in the West at a bargain price. Does that sound like the history that you've read? All the peasants had access to gold?

Remember when assigning pricing, that fiat currency is debt. Wealth comes from producers, and FG allows for wealth to accumulate without increasing debt. Likewise, with increasing debt it will hold its value relative to the increase. That is why those that benefit from the current system will always oppose FG.

"At some price the gold will reverse our international trade deficit, and then our debt will become the better bargain."

I'm having trouble with this one. How does the gold price level reverse our trade deficit? I see how a free market for gold would allow US dollar holders to bid up the price to a much higher level, and I see how that would allow us to settle our trade imbalance with much less gold, but how does it actually reverse the trade deficit (unless the gold sales are counted in the trade deficit calculation--maybe I answered my own question?)

Franco, the paper market has massively expanded the volume of tradeable paper "gold". This massive expansion of "gold" volume has obscured the true value of elemental, physical gold, suppressing the perceived and traded value of all kinds of "gold".

Once an event triggers the collapse of the phantom paper "gold" market, through exposing the lack of elemental gold to back the system of promises, the true value of elemental, physical gold that is either in your possession or officially allocated to your ownership, will be exposed for all to see.

Based on the current volume of traded gold compared to physically available and tradable gold ... we are not just talking about $2000-$5000 for physical gold, but many multiples of the current price. Paper "gold" trade promises will become worthless, but physical gold will likely be upwards of 30 times as valuable to its owner compared to today.

As Jeff indicated earlier, please check out the other posts of FOFOA to find fuller answers to your questions.

Thanks for taking the time to respond to my questions. I have actually gone to the archives and read some of FOFOA's dissertations, but unfortunately for me one thing is to take the time to read a FOFOA article, and an entirely different thing is to actually understand it. So, anyway, I have a hard time envisioning gold at $50k. I mean, let's say that the US Treasury comes out and says "our gold is for sale, but we'll only sell it at $50k/ounce". Why wouldn't the market players just turn to land, factories, platinum, or whatever else is an actual physical asset and get more bang for the buck? I understand that gold has been for a long time the first choice as a store of value, but surely at some point you would start looking elsewhere, no?

Also, I have heard that in ancient Rome one ounce of gold could buy you a nice robe, belt, and sandals. Not thirty sets but one. So how can the purchasing power of a metal whose quantity doesn't really change increase over time by more than an order of magnitude?

Great questions. I think how clearly I can answer them will show how well or not I am following the trail.

Freegold is not monetizing gold, but the opposite. It is freeing it from the burden of "buying a nice robe, belt, and sandals" as you put it (I will come back to that). Freegold is used only as a store of value. Gold is the answer to this problem as you yourself said: "gold has been for a long time the first choice as a store of value", "a metal whose quantity doesn't really change increase over time". What other asset has millenniums of history for support, always with value, and yet still it gets produced at the same rate?

You are having a hard time envisioning gold at $50,000. Again, you are talking about gold in price, as a medium of exchange. That is not what FG is. You have to understand what the role of FG is to grasp the value of what it offers. You ask why not "just turn to land, factories, platinum...". The beauty is what FG creates. All that you named are investments, that you put your fiat into to create more fiat. If you are a Giant, what you want is to pass your wealth on. Factories go obsolete, land goes barren, platinum - is an entirely different subject that has its own list of reasons (that I won't discuss in this context), etc. Will the producers only collect gold with their surplus? No, they will only accumulate their wealth in gold.

Back to Rome. There are a multitude of questions that go with your assertion that begin with gold standard, then fractional reserve banking, and end with hyperinflation. Rome lasted for over a thousand years, what was purchased in Rome has to be put in context of its overall time. However, none of that really even matters to this discussion. Why? You are talking about gold as a medium of exchange, a part of their currency. FG is coming because its not used as a medium of exchange. So how can the purchasing power increase more than an order of magnitude? Because its role is not the same.

Reaching “natural” equilibrium (if FG is the arbiter of such) may be a naturally occurring progression but ideology has a way of getting in the way. That ideology of globalization is based on US enforced (e.g. war) freedom, cheap energy and an overvalued dollar. To "voluntarily" dismantle it is to dispel the myth – a touch like removing the Yen from the currency triumvirate and destroying the carry value of western assets – ergo G7 intervention. US foreign policy in the name of humanitarianism (freedom) is the 2nd pathway outside the dollar to cheap energy – even Saudi Arabia for that matter (maybe that is why they are so desperate to have their own nuclear deterrent via Pakistan conduit). But the challenges to US control of shipping lanes and broader areas of influence grow daily. Check out the jostling over mining companies in Australia and Africa for evidence. War is the enforcement mechanism of the regime not an effect whatever the regime – Libya, Iraq even the Balkans (check the location of US Camp). The stories about Benji Strong during the standard are epic. Curiously, what if the ultimate (real) intangible asset – that is, perceived US even handedness and goodwill around the world - is being undervalued versus the lost PP of the $ in one of the most epic miscalculations in history? One or the other but not both. Which is worse a failed currency or a failed state (idea)? I’d contend the earlier is preferable to the later – FG or otherwise. What if the US declared force majore, defaulted, shut the banks and turned the dial back to a 60-70% debt level that is sustainable – and let the chips fall where they may. In conjunction the wars in Afghan and Iraq were ended and the US declared itself ready to accept spheres of influence? Would the dollar rally, deflate or hyperinflate? After all don’t the bankers say it is all about the intangible? Heretofore the US buy-in since WWII has been the security umbrella - which is why the stories about the Chinese carrier program and carrier missile are so pernicious. Here is China a few short months ago on US humanitarianism: “”the United States turned a blind eye to its own terrible human rights situation and seldom mentioned it. It (US) released the Country Reports on Human Rights Practices year after year to accuse and blame other countries for their human rights practices.. These moves fully expose the United States' hypocrisy by exercising double standards on human rights and its malicious design to pursue hegemony under the pretext of human rights, it said. The report advised the U.S. government to "take concrete actions to improve its own human rights conditions, check and rectify its acts in the human rights field, and stop the hegemonistic deeds of using human rights issues to interfere in other countries' internal affairs." - Xinhua. Now calibrate Russia’s response to the US once again exercising its humanitarian muscle a few days ago. Russia response was sharp to include an SLBM launch.http://news.xinhuanet.com/english2010/china/2011-04/10/c_13822179.htm

"A gold standard will not cure every social ill in the world, nor will it stop all senseless wars. Nothing will. However, by now it should be clear to everyone that the current fiat system is good only for bankers, brokers, politicians, war mongers, and the already wealthy. Everyone else loses as inflation eventually eats away at what's left of the rapidly shrinking middle class".

I am not holding my breath re Obama coming out with anything like your proposal. But, I agree that he would go down as one of the greats.

***** I was at my local coin shop the other day. I wanted to buy AGEs, but with RECENT (2010 and 2011) as that would make my gold pile LOOK LIKE it was bought at a higher price ( I do save my receipts now!). He did not have ANY 2010 or 2011 Eagles. I asked him to tell me to give me his most recent ones. One was 2009, the others older... This MAY yet be another indicator that PHYSICAL gold is getting a bit scarcer as the price goes up... *****

My friend Dominic Frisby put together an interesting video on the rationale for a gold standard."

Here's an example of "quoting someone" who is way, way smarter:

I really despise this kind of gold bug rhetoric because it damages the true story of gold by destroying the credibility of the gold community in the eyes of everyone else. This concept that fiat produces wars is almost axiomatic within the gold community. It is used as a powerful argument for the return to gold money. But what if this gold bug axiom is actually a fallacy? What if it is simply wrong? How much effort has been wasted over the years? How much credibility lost?

**********************************

Here's another example of "quoting someone" who is dumb:

"All fiat currencies including the US dollar are doomed. The only debate is the path it takes to get there."

Here's another example of "quoting someone" who is way, way smarter:

"Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha!

Yea that's you to whom he says "HA!" - to the ignorant hard money socialist. Go get a clue king blowhard.

"I have held physical silver and gold investments continuously for 5 years, and on and off before that. Today I cashed out of silver, trading it for an equal dollar value of gold.

Yay, sounds good so far, must be time for the yuckiness. Yup, here it comes:

"For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

ew!!!!

"As a result of that relationship, I will likely be back in silver soon, but in small amounts, and hopefully at decreasing prices. If silver crashes, I will consider switching a considerable percentage of my gold for an equal dollar value of silver."

You said ". What if the US declared force majore, defaulted, shut the banks and turned the dial back to a 60-70% debt level that is sustainable – and let the chips fall where they may. In conjunction the wars in Afghan and Iraq were ended and the US declared itself ready to accept spheres of influence? Would the dollar rally, deflate or hyperinflate? "

Did the Russian Ruble rally (deflate) or hyperinflate when the Soviet Union fell ?

The Ruble crashed in typical fiat fashion. The dollar will do the same except worse, because it accumulated real things for nothing for a longer period of time.

Your writings would be amusing if not for the constant and predictable belittling. It reeks of the attitude coming from a pre-teen emo girl who never left the grade school playground.

The condescension is counter-productive, doing more damage than good. Use it sparingly and I might begin to laugh at your antics again. Currently, I usually ignore your immature flame-bait.

As for Mr. Shedlock - he is good with short-term financial analysis and he recognizes the systemic problems even if his views on solutions may tend to be rigid and misguided. He has also engaged in heated ridicule of his targets. He lost credibility as far as I'm concerned.

However, rather than alienating those essentially on the same side by attacking them (as misdirected as they may be), open and respectful discourse can solidify a more reasonable perspective for everyone. Communication is how people learn.

FO/FO/A command respect because they consistently provide knowledge without such emotionally-charged irrationalism; what humor and jabs get included are sparse and break up the pace instead of being the theme. The points you post from them are excellent and relevant, but the message can easily get lost when you're being a troll.

As FOFOA pointed out, war is predicated on the resources available to the participants to wage it. A war is lost when the resources needed by one side are no longer available, either because they have run out, or because they can no longer be accessed. The side to which this occurs first loses.

Wars are fought more effectively when value (the utility of the resources) is appropriated via fiat paper currency rather than a gold standard currency, because the value can be extracted more efficiently this way, but war can be waged under either regime. Theoretically, a country with lesser resources and a fiat currency may be able to defeat a more resource rich adversary operating a gold standard, because they can mobilize their resources faster and more fully. This is why if one side ditches a gold standard, all participants must, to avoid being handicapped.

I think this is the nature of the power to which you refer, the ability to appropriate the resources of the country, and it is possible under either regime, fiat or gold standard. Fiat is simply more efficient in this regard.

What is the difference between the two?

Value is (mis)appropriated from the currency by debasement; inflation. Under a gold standard, savers not wanting to be parted from their capital by such means exchange currency for gold, diverting their capital to an asset in their own possession, and thus unavailable to others. But the exchange rate is fixed! The debasement has already occurred, so there are more notes than gold to exchange them for... some savers will miss out, because in effect their savings have already been spent.Their value is gone, already consumed elsewhere.

On a much larger scale, this is our global situation today, where the saver’s savings have already been spent if they were denominated in fiat currency. This is how we witness so many people receiving something for nothing these days (socialism/welfare state/whatever), because it has been financed by the value stored in fiat currencies, by the saved resources of society’s net producers.

Of course, if gold were to freely fluctuate in value, value could not be misappropriated in such a way, because value would flee into gold, and the currency would reflect that, because gold values currency and not the other way around.

But gold freely fluctuates in value now I hear some pundits scoff.

No, it does not. The price you see fluctuating is not the price of gold, but the hybrid price of physical and paper gold, a completely different thing, different because one is an asset and the other a liability. These paper liabilities are fractionalized into existence in order to dilute the total stock and keep the price low, thus maintaining access to the power that were referring to when you said ”Power is the corrupter.”

Remember, assets value liabilities, not the other way around.

Would it not then be accurate to expand your statement to: "The power to appropriate the value of others is the corrupter."?

The power to acquire a free lunch.

So... if unencumbered physical gold (an asset) were to fluctuate freely against currency, it would be both an accurate measure of currency's value, and a termination of the source of this “power that corrupts”, wouldn’t it?

He called Gonzalo Liras famous piece "how hyperinflation will happen" a joke, he didn't even read all of it.He insults Peter Schiff and many other inflationsts all the time. He turns down debates like Paul Krugman.

"I think they would really like to hike at least once more before the end of the year," said Carsten Brzeski at ING. "The hawkish gut feelings say, 'as there is the soft patch coming, you do it sooner rather than later'."

That fitted with ECB policymaker Christian Noyer's statement on Tuesday that the central bank remained in a state of "grande vigilance" over inflation pressures.

Postbank economist Thilo Heidrich said pipeline inflation pressures remained strong and the headline figure could peak at 2.8-2.9 percent by the end of the year. Alexander Koch at Unicredit predicted a high of 3.0 percent.

I care very much when people like you come here and spew disrespectful nonsense, especially when its done in the face of our host's considerable efforts to be welcoming and hospitable. See unlike Poser I really enjoy FOFOA's insights, and few things irritate me more than seeing the short bus crew "romper room it up," especially when FOFOA has been so accommodating. There's no need for him to waste his considerable intellect on such quixotic endeavors.

So I'll gladly oblige the collective need to address such nonsense so as to allow our brighter bulbs to focus their energies on the pertinent issues at hand. As they say, "the world needs ditch diggers too." :) Especially when someone has been as inhospitable and unconscionably rude as the Poser.

Many will recall that FOFOA very kindly wrote a long 5 part comment addressed in part to Poser that turned into Bitcoin Open Forum - Part 3.

FOFOA even indulged the Poser further in the comments like here and again here.

That's right, FOFOA took the time to carefully formulate and present multiple written responses specifically designed to address the Poser's world view *after* the Poser had shown up here refusing to consider the world view FOFOA has copiously cultivated. Talk about a humble and gracious host!

Yet, like a rude a rude and disrespectful guest, Poser persisted in blowing off FOFOA. A great illustration is how after all of what FOFOA offered to help *Poser* understand, Poser went and posted this crap.

I recently had the opportunity to read Doug Casey's take on Bitcoin and felt it provided a good format for targeting specifics.

On describing a currency's required properties:

It has to be durable, divisible, convenient, consistent, and have value in itself. But don’t forget your own addendum of “can’t be created out of thin air infinitely.”

*******************************

Wat? Here is the full context to the quote Poser references:

Doug: Again, it’s quite encouraging to see that so many people are so disgusted with government currencies, and the total lack of privacy in banking. That’s why Bitcoin could catch on at all. But let’s go back to basics, and see if Bitcoin qualifies as money. Money is a medium of exchange and a store of value. Bitcoin may work as a medium of exchange sometimes, but not a very good one, because it’s proving so unstable. It has fluctuated so much in value over its short life that it is totally unsuitable as a store of value. Over 2,300 years ago, Aristotle identified the five essential attributes that are necessary for a good money…

L: It has to be durable, divisible, convenient, consistent, and have value in itself. But don’t forget your own addendum of “can’t be created out of thin air infinitely.”

Doug: Right. Let’s see how Bitcoin stacks up. First, is it durable? As nothing more than ones and zeros on a computer network, it might seem that the answer is no – it’s certainly not as substantial as gold. But a Bitcoin is arguably a lot more durable than a piece of government-issued paper than can be lost, burned, or even fall apart in your jeans pocket if you forget to take it out before doing the laundry. Moreover, since the Internet was designed to be multiply redundant, and even able to withstand nuclear attack, it’s arguable the Bits won’t just disappear.

So we have FOFOA citing to Mises, Menger and Hayek to explain the separation of monetary functions, and we have Poser ignoring these sources in lieu of Doug Casey, who thinks "Money is a medium of exchange and a store of value."

But what is more interesting to me is the extent to which Poser goes to support *his worldviews.*

As we know, Poser is an unabashed supporter of Bitcoin because he is an self-proclaimed anarchist. Many will note that amidst our cute little Poser anarchist's advocacy for the wonders of "everyone's favorite decentralized currency unattached to the evil state," Poser is citing to Doug Casey, who is relying on the famed greek philosopher "Aristotle."

Doug...Over 2,300 years ago, Aristotle identified the five essential attributes that are necessary for a good money…L: It has to be durable, divisible, convenient, consistent, and have value in itself."

No, that is not the Aristotle who knows of Another and economics, but the guy whose understanding of money is:

"Money has been introduced by convention as a kind of substitute for a need or demand, and,...its value is derived not from nature but from law and can be altered or abolished at will"

See that, our Poser anarchist is ignoring FOFOA, Mises, Menger and Hayek in favor of an anachronistic understanding of economics advanced some 2000+ years earlier by a philosopher whose *fundamental precept* is that the value of money "is derived not from nature but from law and can be altered or abolished at will."

WOW. So despite multiple extended efforts by FOFOA to try to reach out to the Poser anarchist, the Poser anarchist responds by blowing of FOFOA and espousing a monetary theory that rejects the subjective theory of value and instead holds that the value of money is entirely a function of the laws of the state.

OK Poser boy, keep trying to justify bitcoin by advocating for the position that money derives its value from the state's omnipotent power. On the other hand, as was explained in the comments Return to Honest Money:

Another fellow that like Aristotle also had a name that started with the letter "A," but who unlike Aristotle was educated in economics, observed:

Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"!

"These paper liabilities are fractionalized into existence, dilute the total stock and keep the price low..."

I do not want to imply more intent on the part of those performing this dilution than I can demonstrate, but the connection does seem to want to make itself, as ultimately this is how that power is maintained.

It never ceases to amaze me how each time FOFOA posts a new trail-marker, the trail becomes so much clearer! I hadn't even realised I was getting led up the garden path with the idea that fiat is somehow responsible for wars. Thanks again FOFOA, with with an appropriate, unencumbered quantity of that credit going to Costata! :)

Fantastically informative article but I will have to disagree with the anti - goverment defecit belief held commonly withen these pages.I have watched Europe slowly atrophy under EMU & Euro monetory governance.It could be characterised by the export of credit to the Periphery as the more productive core was unable to get into a healthy fiscal defecit (reduce credit deposits & thus leverage) to absorb its organic wealth creation and use this fiscal debt for future growth in their utility and technological development.In fact the leverage ratio has exploded during this time period if you consider the tax base of a country its non leveraged base.This death of the west goes back to the flawed monetarists dogma of CBs targeting interest rates rather then the base to control inflation - this policey over 40 years old now has destroyed nearly all of its capital to service interest.The quaint idea of the eurosystem dumping the Pigs with one free bound is well quaint , we hold a very large proportion of this unproductive credit which is unpayable at current Euro values.The core depends on this false external income as it did not get into suffiecent defecit to build its core wealth in utilities and elsewhere during the last 20 years or so.Ireland for example holds very little of its sov debt - so any increases in tax makes the situation dire as it cannot save when the money supply is being exported - the eurosystem has prevented the default of shadow bank debt and now does not produce enough cash into the system that would enable the periphery to save in its own debt which is now making this farce far worse.The situation has now become intensely poltical - I am now advocating a Union with Britain again with Hollyrood(Edinburgh) like powers as the ECB is threatening famine and pestilence to any potential Euro rejectionists.

Witness Lorenzos final remarks to liesman on CNBC this past weekhttp://video.cnbc.com/gallery/?video=3000035173

-this is a Munich like threat - any appeassment of such obvious psyopaths will invite further financial violence - he never mentioned that free nations do not have to pay back the money back in the Euro currency.It is politically explosive to take monetory & border control power away from states during the 90s , then fiscal power during the crisis and now the fiscal authorties are bailing out the monetory authorties of the IMF / ECB !!!

This is a complete annihilation of the social compact.Meanwhile Euro integrationists wish to use this crisis as a opportunity for further integration by propelling fiscal power into a Euro treasuary creating a Nero like Rome / Brussels - destroying what is left of representative goverment.

You cannot attack the 400 year old European nation state concept in such a violent financial manner and expect no poltical reaction.

The Euro is a Dr. Frankestein created monster used for massive cultural & economic subjugation & engineering

Have you been to Frankfurt or Brussels recently ?http://www.youtube.com/watch?v=Th5xPRFlnjQ

JR does seem to enjoy condescending mental masturbation to a point of annoyance. Likewise, Mish hardly deserves the credit of a reply - I think a greater insult is to ignore him; blowhards tend to exhaust themselves. I've said my piece on both, so I'm done and back to ignoring them.

Thank you for examining my statement "Power is the corrupter." Unless subliminally I'm much smarter than I am conscious of, I don't think I actually grasped what I was 'referring' to other than paraphrasing one of my favorite quotes.

I have any idea what the eventual outcome looks like nor am I partison in the debate. However, whatever comes next will need more than a shadow authority (FG); a shadow authority is not only ahistorical it is the antithesis of the human condition. A collective of the world's resources will underwrite whatever comes next (the US will be at the table) - isn't that what the Kish bourse is about (or Iraq, the Sudan split, AFRICOM, Somalia etc..)? To wit, what if the default occured tomorrow circa FDR? Obama gets on TV and declares the day of shared sacrifice is upon us as the banks M2M and depositors stand astride their sr. creditors in awaiting their haircuts (and a few arrests). Then he declares in the next breath a long march to reworking the energy infrastructure to leverage the massive shale plays and domestic oil (as a bridge if nothing else) - see CHK presser this week? After all the leverage crunch is going to shake out the need for a few million Boe/d (only Q is now or later - so far it has been later). World then has a choice as the marginal consumer falls away: workout or let the US atrophy like a soviet corpse or keep it a player (perhaps only out of pure self interest as each player looks to their own sphere issues). Think about it? Is the world really ready for a hard break? Even if it does occur and FG takes root - what happens next? The sun rises and those hard choice between preserving the woodpecker or capping carbon (and fracking ) happens, fast. US consumers go back to living like it was 1980 (it wasn't so bad) and the race to innovate goes on. Space, technology, biotech, life, alternative media, the royals, etc.... Capital is an interesting animal if left "largely" - jihadis scare me - unperverted (Argentina issuance case an point). Gold will be at the table too. Like it or not the US is still one of the most efficient marginal users of resources (and the US still has a lot of those). Freegold is also ahistoric. Maybe the expected value of FG is the human condition...

Peter Schiff, Doug Casey and anyone that doesn't think gold will go over 5 to $6000 or who doesn't believe that the current system will change, would call your comments conspiratorial. They already have. Even though FOFOA's take on the effect of bullion banking on the price is totally different then GATA's, the silver bugs et al.

It seems impossible to break freegold into the minds of people like Schiff and Casey because the minute you mention bullion banking, they misguidedly throw you into the gold suppression GATA camp. To them, this is freegold now. That is also why they advocate a gold standard, because they think that every gold bull market is just a bout of freegold that will come and go.

(not expecting a reply from you, wouldn't want to get in the way of a good ego trip)

Nobody really knows... But I am just trying to apply some Occams razor. We have examples of when this has happened in the past. The Soviet Union and the British empire.

I don't see anything that will stop the US from going the same way as Russia after the Soviet collapse(it wasn't so bad, seriously)But the US might be able to recover allot faster then Russia did, depending on who gets elected. They also have 8000 tons of gold to fall back on.

And I also think the world is past due for a hard break. Who would have thought that after WW1, WW2 would be just around the corner.

Thank you both for your kind words. Like most of us here I'm continually trying to catch up to FOFOA -- knowing he can easily outrun all of us without even breaking a sweat! But when something clicks -- it REALLY clicks! Of course, both of you know exactly what I'm talking about.

I also have a huge Thank You to give to JR. I went back to read FOFOA's Euro Gold post three times and man, JR, what can I say? Someone needs to give you an Assistant Trail Guide badge. ;-)

These numbers should have the attention of anyone who is wondering if another slump is coming in the near future. They say: Yes.

http://www.zerohedge.com/news/meanwhile-global-economy

Sean Corrigan (my emphasis):Market participants should not lose sight of the fact that, far beyond the twin, transatlantic farces, a rather darker drama is beginning to play out in terms of world economic activity.

The first warning signs come from the freight industry, where US West Coast container traffic has slowed appreciably. Imports, indeed, have decelerated to an extent only exceeded—and then by the smallest of margins—a handful of times in the past 15 years, sending the growth rate plunging from August 2010’s chart?topping 26.4% to a 17?month low of 2.2%.

More broadly, while US intermodal rail traffic is still setting records, its tally now stands a bare 2.5% above the reading recorded at the same juncture in 2010—a sharp deceleration from that earlier period’s 26% YOY increase.

Matching this, across the Pacific, Shenzhen port numbers are also barely in the plus column, as of May?June, while Shanghai has dropped from 18% yoy in the whole of 2010, to a 16?month low over the quarter, touching 7.4% in June itself.

Then we have the IATA air freight numbers, recording their first global decline since the crisis, paced by a swingeing 9.8% YOY drop in the crucial Asia?Pacific region—a drop only exceeded during the worldwide export slump between Sep?08 & Mar?09.

Always fun at the FOFOA bloggot auto-rickrolled watched a couple of good spit fights and as always...learned to look at something in a new way.I will certainly continue to contribute to the FOFOA "Defend the Precious" fund..

Is this true? PBoC adapting to the structural change of the Euro to best align itself with the rising price of gold? MK is almost there in that he's focusing on RPG, but in the beginning of this "newscast" he's still taking about a gold standard -- and the chances of that are -- let me see -- 0%?

Buy gold with RMB on the PAGE and then sell into the COMEX? It sounds to me he's talking about China entering the $IMFS paper markets. This is paper gold! 90 day spot contract? Are counter-parties mandated to settle in physical gold? Is China's exchange any different than that New York? Ned might say, "Yes. Deliverable is guaranteed! Full allocation! No leases -- and no swaps!"

Ned is focusing on the (lack of) integrity at the LBMA clearing house. BOE is the lynchpin he says. The "good" Chinese contract for future gold delivery will drive out the LBMA's "bad" contract for future gold delivery? Reverse Gresham's Law? Will China join Europe's redemtion plan when US markets fail to deliver?

It seems pretty obvious Ned is reading FOFOA. I'm not so sure about MK.

If this is true and the Chinese market mandates physical only settlement (I cannot confirm this), Fort Knox is going to be unlocked sooner rather than later.

Max Keiser discussing the implications of the contracts being offered on the PAGE with Ned Naylor Leyland of Cheviot Asset Management. I have read or listened to a few analysts trumpeting the significance of the opening of PAGE but none of them connected the dots like this analyst.

In order to try to kick start the discussion I’ll contribute a summary of some of the key points and a few observations. You can also read a short article by NNL on page 6 of this document from which I have taken a few extracts and included them below. I’ll conclude with some background notes on the strategic importance of the location chosen for PAGE – Kunming the capital of Yunnan province.

NNL (my emphasis):Last week was the opening ceremony for the Pan-Asia Gold Exchange (PAGE), involving SAFE (State Administration of Foreign Exchange) and the CSRC (Chinese Securities Regulatory Commission). PAGE is owned by Chinese SOEs, the metals will be stored at Fudian Bank on an allocated basis and borrowed gold will crucially involve the transfer of title.

1. Initially PAGE will issue two contracts and there will be a daily fix at 8.00 am Beijing time. The daily fix will be based on the reports of physical gold sales by six very large Chinese banks – including the Agricultural Bank of China (who will facilitate trading in a retail contracts by their 230 million customers).

NNL:This new exchange understands the issues about leverage and leasing and the market-maker will be writing notes exclusively against allocated physical, which in combination with the new Fix has the chance to markedly improve price discovery.

2. Of the two contracts the spot rolling 90 day contract is the more significant in NNL’s opinion. It will be priced in Renmimbi (RMB) and it goes live in September 2011. International investors will be able to trade it. Each contract will have title to actual physical gold.

>> Observation: The daily fix will set the spot price of gold in RMB but, more importantly from a Freegold-RPG perspective, it will also show the daily value of the RMB priced in physical gold.

3. NNL views this as an attempt to break the stranglehold of the Western BBs on the spot price of gold by offering a superior alternative to the LBMA and Comex offerings. The PAGE contract is not paper gold, an unsecured loan to an LBMA member BB or a mechanism to control the spot price of gold through issuing and trading paper gold.

4. NNL points out that this contract will also allow the RMB currency itself to be traded via gold.

NNL (my emphasis):Bearing in mind that the RMB will only be available to those holding allocated Gold, the inference about RMB in the future here is where the real interest lies.

>> Observation: IMO allowing the RMB to be traded against a floating gold price represents a significant step toward full convertibility of the RMB into other currencies.

5. MK talks about the “US dollar peg” of the RMB which is inaccurate. The peg was dropped in 2005 and now it’s a managed float against a basket of currencies. In the interview NNL observes that this will bring pressure to bear on the “synthetic” peg of the RMB. He declines to speculate how this will play out.

>> Observation: In my opinion this is a major step toward a floating exchange rate regime for the RMB.

Take a look at where the Chinese have located PAGE – Yunnan Province. Yunnan and its capital Kunming is in the far southwest of China. Nowhere near the main coastal centres. Wikipedia describes the terrain in this province (my emphasis):

Yunnan is situated in a mountainous area, with high elevations in the northwest and low elevations in the southeast. Most of the population lives in the eastern part of the province. In the west, the relative height from mountain peaks to river valleys can be as much as 3,000 m…..The province borders Burma, Laos, and Vietnam.

Therefore they have a geographic buffer in the southeast and a wall of mountains in the North. This is a fortress.

The Chinese are building a deep sea port in Myanmar (Burma) and a rail link to the port. The extract below is from this brief report in The Hindu.

Myanmar and China plan to build a railroad together that will link China’s landlocked Yunnan province to a deep—sea port being built in Myanmar’s Rakhine state.

The state—run New Light of Myanmar newspaper reported on Thursday the project will start with a 79—mile (126 kilometer) rail link between the border town of Muse and Lashio in Myanmar’s northeastern Shan State. That first phase is expected to be built in three years.

The completed railroad will extend to a port China is building in Myanmar’s Kyaukphyu town in northwestern Rakhine. China National Petroleum Corp. is already building a 480—mile (770—kilometer) pipeline from Rakhine to Yunnan.

The ties between China and Myanmar in the energy field are also expanding. A few snippets from the Wikipedia entry on China-Burma relations:

China is one of the chief partners of the Burmese regime in the project to renovate and expand the Sittwe seaport and has received rights to develop and exploit natural gas reserves in the Arakan region.

Chinese firms have been involved in the construction of oil and gas pipelines stretching 2,380 km (1,479 miles) from Burma's Arakan coast to China's Yunnan Province. China National Offshore Oil Corporation and the China National Petroleum Corporation hold important contracts on upgrading Burmese oilfields and refineries and sharing of production.

PetroChina is in process of building a major gas pipeline from the A-1 Shwe oil field off the coast of the Rakhine State leading to Yunnan, accessing and exploiting an estimated 2.88 to 3.56 trillion cubic feet of natural gas.[7][5] A proposed Sino-Burmese oil pipeline off the western coast of Burma may permit China to import oil from the Middle East, bypassing the Strait of Malacca.

Thanks, I agree - machines! I still cannot see part 1 in my browser. I can only see parts 2 and 3. Bizarre.

Yes you can take delivery if you want to according to NNL. From the moment you take the contract you have title to allocated physical metal. If the information is correct I think this is a genuine game changer.

FOFOA,

If the three files are up can you tidy up the deletions? If not, please let me know and I will attempt to reload them.

One very important question in my mind: will one be able to short gold in this exchange, or only sell AFTER you buy a contract (written only by the exchange against ALLOCATED gold)?

Technically speaking, shorting in an allocated gold environment would create major clearing problems for the exchange unless the shorting party has gold on reserve with the exchange to make good on the short...

Ned didn't discuss shorting. I assumed that the seller (short) would post allocated gold and the buyer (long) of the contract would post RMB as security. If there is any margin lending to longs I guess the lender would have to wear the risk and settle a defaulted contract.

(Of course, being China, they would probably cancel the trade, return the gold to the short and take Mr. Defaulting Long out into a field and put a bullet through his head. "Slaughter one to cow 10,000" - Sun Tzu.)

If the seller was a miner hedging then I imagine that the market maker(s) would swap physical allocated against future production from the miner.

Blondie,

I take your point about the spread. It seems to me that the volume on PAGE would also be an interesting indicator.

I would be watching Zurich as well. If they adopted a physical only model it could put London in an interesting position.

This could potentially be the catalyst for the long-awaited decoupling of paper and physical, because allocated must be physical. PAGE sounds, via Ned’s description, like a physical only exchange, or at least one of the contracts will be. This is the creation of a new spot market, a new spot price, is it not?

It seems that the PAGE will be a direct competitor to LBMA, offering a daily fix coordinated by six Asian banks... the difference being that this exchange deals in allocated gold. Allocated cannot be fractionalized, it must be 100% reserved, with owners having clear title to a specific numbered bar. PAGE = physical, LMBA = paper.

On the shorting issue, it should not be possible to short PAGE without having a physical offset on deposit there... but why bother when you could short the equivalent COMEX or LMBA contract where there is no such requirement?

Other exchanges may be compelled to act too, because whatever the case we can be sure arbitrage will sort things out wherever it locates a discrepancy.

One firm that gathers and analyzes the data is Argus Research, which publishes its findings in the Vickers Weekly Insider Report. One indicator that the firm calculates is a ratio of the number of shares that insiders have sold in the open market to the number that they have purchased.

In the week ending last Friday, according to the latest issue of the Vickers report, this sell-to-buy ratio stood at 6.43 to 1. This is higher than 95% of other weeks’ readings over the last decade.That’s ominous enough, but consider last week’s sell-to-buy ratio for just those issues listed on the NYSE or AMEX. That came in at 13.10 to 1, which is the highest reading for this ratio since when Vickers began collecting the data, which was October 1974.

Thank you for humoring me in speculating what the shorting environment would look like in a physical (PAGE) exchange.

The Chinese curse of "may you live in interesting times" would apply here for price discovery.

To state the very obvious, as the purchase of a contract implies ALLOCATION, someone would be willing to actually part with physical good at that price.

Since shorting in the paper gold would not work, it would certainly, as Blondie indicated, be left to the London and Comex trading hours for shorts to beat down the price.

They might be successful for a while (impractical to take delivery and ship out physical from the middle of China for outsiders) , but as Costata notes, if Zurich goes to this model also, well, let's just say that I hope everyone is already all in at today's prices in fiat.

Oh, and one more obvious thing, since this exchange MUST be part of the Chinese government policy, they just created for themselves a nuclear option ( being able to have a credible way of resetting the gold price upwards sooner if they don't get cooperation from the $ cartel) .

Great platform, but how many international investors will it really attract? It is, after alll, still in China. Many are stiil afraid of their currency, govt. stability, and true committment to capitalism.

What is the Chinese motivation? An alternative to the paper gold markets? The nuclear option of pricing in freegold? Is this a way to bring more physical under their control? How does this tie in with their moves into the euro?

Is China actively pursuing freegold? If so they must believe the gains would offset their losses elsewhere. How much gold does China really have for this to be true? Who is 'big trader' from HK?

I was thinking of the drama of the rare earths that unfolded over the past year where China effectively controls the flow.

China is the largest gold producer today, and therefore any rare-earth-like game to restrict the flow of gold coupled with this exchange gives the Chinese leadership the greatest of all "nuclear options" - especially since gold stock behavior is to stay still when flow is restricted.

I would not put it past Chinese government to make it their policy to ensure that gold re-pricing when needed makes up for paper losses in USD "assets" in order to ensure continued domestic growth though government spending, in order keep the lid on any major popular discontent caused by slowing demand from exports.

I wanted to come back to your last stop here on the GoldTrail to address your points and expose myself to the world. (smile)

I bet you and many hikers think I am tagging all Americans and gold thinkers with this "Hard Money Socialist" label. Ha Ha,,,,, let me slowly turn around so everyone can take a good look what a HMS looks like. Yes, that's right,,,,, I fit the definition completely.

Most of my life I thought gold should be locked into any official currency system so to act as a gauge and controlling factor against socialist tendencies in governments. I studied and in some cases talked to all the prominent thinkers on the subject.

In the late 60s, when Harry B. was living in LA, his pre book views took on quite a following. Me included! Oh, it all seemed so natural then; the eventual breakdown of our misguided economic policies had to, one day, kill the whole dollar printing game! We all thought that "the coming big failure" would drive every governments back to using gold as money; or at least in some version of another gold exchange standard.

However, even then, I had some serious people pointing me in a different direction....

...I also looked back at these other guys explanation of things and they were every bit correct too,,,,, the effects were the same. Then as the 70s ended and the 80s ran on, their much more longer term understanding really took hold and left all other gold / currency explanations in the dirt. True, all the rest of the hard money crowd gained a little with each gold cycle high, but were also shot down with each cycle drop. The trouble is that historic process is a time consuming afair (smile) and most of the younger boys and girls that come here don't have a full hands on perspective to how we got here. Current dogma has a way of leaving out important turning points that are really needed to be factored in. Hell, a few decades of cycles became so regular in our mind set that a whole industry was born, explaining why cycle investing works (smile). In time I came to understand that there really was a long term, singular move, evolving along as a political play at work here. The last decade only served to underscore it all....

My typical hard money shared long held belief, back then, was always:

----"Gold is the only official money of the world and will return to these roots one day"-------- and -----" some world wide financial dislocation will drive all governments back to this position"-----!!!!

It wasn't going to happen, no matter what, short of nuclear war. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiatdigital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?"

"No,,,,,,, my guys are dead on the money with respect to the political dynamic that's playing out. The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game. This very long term transition is playing on a move away from dollar domination with Europe preparing to suffer less than us by pulling in as many other political trading blocks as they can.

When you look at who they are reaching for; every one of these blocks wants gold moving higher to shelter their dollar trading losses. None of them expect to unload dollar reserves because our end time trade deficit won't permit it. They can't just send the dollars to each other, buying their own goods that would never exhaust the external dollar float. Hell they now have their own money to do trade with, the Euro.

The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline as we are already stretched to the leverage limit. They know that Greenspan has but one policy to use and that will be super printing. He is doing it now, right on que!

The ensuing domestic price inflation will waste away all buying power of dollars overseas. This is where they must install a free market in gold that ends international confidence in the current gold fractional reserve game. This is the "what for" of Britain moving itself and it's gold operation into the Euro arena. Once safely there, or there in initiative, the ECB and BIS could cash out England's goldliabilities without crashing London's banks.

Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha! These are the same guys that, throught the 90s, put every dine in expensive gold stocks and watched dollar currency inflation drive the dow up a trillion points while political actions killed their leveraged gold plays. Now they will refuse to buy physical when political will is about to impact this sector and they will most likely stand by while a Euro based dynamic starts another economic surge later. "

...This political process of fixing money value with the singular weight of gold locked gold into a never ending money vs gold value battle that has ruined more economies, governments and societies than anything. This is where the very first "Hard Money Socialist" began. Truly, to this day they think their ideas are the saving grace of the money world. It isn't now and never was then.

Further along

When investors today speak of using gold coin as their money during a full blown banking breakdown, what are they really speaking of?

In essence, they would be bartering and trading real goods for real goods. The mention of spend their gold money is a complete misconception in Western minds. Many would bring their memories of past buying with then and that is where the trading values would begin. Still, it would take millions of trades before the "market place" could associate a real trading value to the various weight units of gold. It took mankind hundreds? of years to balance the circulation of gold against its barterable value. Only then could a unit weight value become a known money concept. In that process, in ancient times, gold had a far higher "lifestyle" value than it has seen in a thousand years. This value, in the hands of private owners, is where gold is going next.

If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold's value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments. A better knowledge and understanding of the value of all things. "

“The impact on the price of silver will be even more pronounced. Silver is a much smaller market and already in tight supply. If just 1% of Agricultural Bank of China customers buy 500 ounces of silver, that would require 1.6 billion ounces of silver! I believe the leveraged and naked existing short side concentration in silver will be blind-sided by this. In my opinion it will create a massive short squeeze.

But when i got on PAGE's website i dont see anything mentioned ever about silver in the rules, just gold.

http://www.pagold.net/List.asp?C-2-18.html

Are these silverites nuts or am i missing something? They still believe silver is the same as gold and whatever is good for gold is even better for silver.

Now i know they are all very excited about the HKMex now doing silver contracts.

I'm still unclear on how China gets the gold it will take to run the exchange. Yes they have a tonne or maybe 2 but is that enough to manage the larger contracts especially when dealing in allocated bars? It would seem that they will need to acquire a good deal more actual physical. Will that process of acquisition not put a huge stress on the physical market? I'm just thinking back to the stories about how long and how much time was required to get Sprott silver fund up and running. I realize PAGE is not a fund but still I would imagine a need for significant stock supplies to create a marketplace in gold . Could they possibly already have significantly more than is widely believed?

A peg is a fixed rate. NNL described it as a "synthetic" peg which is a reasonable way of looking at it. The exchange rate is managed but it is not a peg. The RMB has appreciated against the US$ since the peg was dropped.

The RMB is managed against a basket of currencies and the US$ has the most weight of all the currencies in that basket. The appreciation of other currencies within that basket against the US$ influences their currency management decisions as well.

"Look at the charts..."

I have. Again as I said the RMB has appreciated against the US$ since the peg was dropped. Certainly not a free float, but not a peg.

We are all unclear on almost every possible metric, gold-related or otherwise, so don't be expecting an answer to your question any time soon... who knows how much gold China has access to?

FYI:

China does not have (known) particularly rich in ground gold reserves, and yet it is currently the world's number one producer. China is mining its reserves at such a fast rate that, if continued, all known reserves will be exhausted in about ten years.

Why?

Do they supply accurate figures? Are their figures on their CB reserves accurate? Who does supply accurate economic metrics today, vs announcing whatever spin they would like the world to believe?

While you are certainly a "trail guide" in your own right (and a darn good one at that) allow me to put forth my opinion that you continue in your role as "trail sheriff". That role is equally important to keeping this wonderful site as troll-free as possible. As you duly noted, your reprimands were well-warranted and not the least bit undeserved. Our "hosts" time is far too important to waste on such a troll.

China is a communist dictatorship. There is no rule of law. The Party can and will change the rules whenever it is in their interest to do so. Heads they win. Tails you lose. Buy Chinese gold at your peril. The concept is great. The implementer is untrustworthy. China is not the place where FreeGold will happen. It is where gold goes to die.

Star-gazerso you do not expect much from PAGE even though they will assure allocated gold? I would expect a certain degree of openness would be needed, more than we have seen in other areas (OK almost all) other areas of Chinese economic reporting. I guess the success of the enterprise will depend on how open they are. But if they make it work I would expect this to be a significant addition to the world gold market.

“I'm still unclear on how China gets the gold it will take to run the exchange.”

It’s the other way round. China gets the gold by running the exchange.

Look at it from the Chinese perspective for a change. You’re a Chinese businesswoman manufacturing goods for export. You have a surplus of Dollars, Euros, Yen etc. Up till now, if you wanted to save gold, you had the option of dealing with the physical yourself, and all that entails (FX to Yuan, purchase, transport, storage, insurance etc) or trusting Western “gold” contracts.

Now you can just phone your local Ag Bank knowing it’s allocated and titled.

So where do all the Dollars, Euros, Yen go now? Back where they came from, as before. But now, instead of sucking in bonds, they suck in physical gold. From the Western suckers, who get a slightly better fiat price in China than in the West, due to the increased demand. This will be like a giant vacuum cleaner, hoovering up all the weak handed physical in the West.

China doesn’t need any gold to run this market. They unleash their massive demand on the West, and it’s up to the $IMF to try and supply it, else physical dries up and game over.

"Buy Chinese gold at your peril."

Do you think China cares if the West are scared of storing their gold in China? They want to buy your gold, not store it for you.

Paul...thank you for the commentsI have to admit as a buyer (and never a seller) of gold that I had no idea there would be a high interest in Western sellers divesting themselves of that much physical gold. As a speculator I have both bought and sold GLD and other metal ETFs but that was just a money game. After deciding that it was time for that game to end and to begin preparations for a possible 'end of the dollar' scenario it has been 'buy only' and 'physical only' for me.I just have the feeling that most individuals now in possession of physical gold will hold it as tight as they can. The bullion banks are another story but I do not see them surrendering large lots of physical up to transfer to China.So I'm either wrong about my understanding of the attitude of gold owners or I'm back to the question of where China gets their (new?) gold.

Historically gold has always flowed to where it's valued most. The little that flows, that is.

Mine production mainly, but gold is always flowing as savers become consumers and vice versa. The gold that has to be sold will be sold for the highest price available. A market that is physical only will always pay a higher price. It must.

So arbitrage will pull physical from the Western paper markets and send it East. It will work until it doesn't.

From China's perspective, its a brilliant move. The US has been banging on at them to devalue the Yuan, and now they will. But against gold, not against the dollar. Either the West ponies up, or the gold paper markets burn.

China either gets the gold, or gets the end of the "exorbitant privilege". Most probably both. Checkmate.

Is the HKMEx state-run or privately-owned? There appear to be a lot of current/former state agency members in management, but a lot of non-Chinese and foreign investors as well. So why would it matter where China gets its gold?

Also, what would the point be of developing an attractive environment for foreign capital flows only to turn around and smash it apart? If anything, it would be a short-term boost resulting in wealth fleeing back to the loving arms of the COMEX/LBMA. I don't see how China can do without foreign investment right now unless the nation is ready to face internal unrest. The domestic economy doesn't seem robust enough yet to support itself in relative isolation, let alone drive global growth.

The dollars can return through the gold market.

And oil, steel, coal, etc... buying the assets and means of production with depreciating dollars just like an individual buys gold and stockpiles food.

"And oil, steel, coal, etc... buying the assets and means of production with depreciating dollars just like an individual buys gold and stockpiles food"

True, but the average small business person doesn't save using coal.

They've been forced to recycle their dollars through the banks, who cycle them through the PBOC, who've been buying bonds (or more recently oil, steel coal etc)

The point is, the decision on how to recycle dollars is no longer with the big banks and industries and their state advisors, its with the people. All 1.3 Billion of them.

And in contrast to our financial media, this is what they are reading:

http://en.ce.cn/Insight/201103/01/t20110301_22258099.shtml

the Economic Daily which "has become one of the most influential and authoritative newspapers in China, an official outlet for the government to publicize its economic policies, a major database for Chinese entrepreneurs to gather information, and a reliable source for Chinese people to obtain business news relating to their daily life"

I'd like to throw in a thought or two that occurred to me as I was reading your comments about PAGE and to touch on this issue: Where will the gold come from?. ‘Paul I’ and others have pointed out that the flow will go to wherever the best price is offered. Since the aboveground stock of gold has not shown any sign of flowing in the past few years let’s assume this continues to be the case. That leaves scrap gold and mine supply as the only reliable sources. As long as the flow of gold continues then perhaps the real question is: Who are the Chinese competing with for the flow?

Ned Naylor-Leyland concentrated on the 90 day spot rolling contract available to international investors like himself. It’s quite clear that he believes PAGE will win market share from the LBMA and Comex. (Ned feels that this will lead to more accurate price discovery in physical gold globally. Many of you (me too) agree.

Now returning to that question Who are the Chinese competing with for the flow? I would like to focus on the retail contract which PAGE is offering.

Bear in mind that it is being facilitated by the Agricultural Bank of China and they have 230 million customers. How many of those customers are farmers? Probably a lot. What’s been happening to the price of agricultural commodities? I understand that the price of pork is up over 50% in China over the past year to name just one staple food in China. Most, if not all, of this produce would be locally produced even if some of the stock feed is imported. These rural producers in China may be in the process of becoming much wealthier.

According to a table I saw recently India accounts for around 32 per cent of the gold purchased annually and China accounts for around 20 per cent. China has come from nowhere in a few years to be second only to India.

Let’s compare India and China in terms of their banking networks and gold distribution networks. (Any readers with local knowledge and/or recent experience “on the ground” please jump in and correct me if I get any of the following points wrong. I will welcome the correction.)

India’s rural population is relatively undersupplied with banking services but it does have a highly developed gold distribution network. In my opinion it doesn’t matter whether the network is formal or informal – as long as it works.

China has been actively expanding its banking services for rural citizens over the past few years but the rural population is still relatively undersupplied with banking services. China has only permitted its citizens to openly buy gold for a few years. China’s government has elected to make their banking system the distribution channel for gold and silver bullion.

The religious festivals which tend to create spikes in gold demand in India coincide with their agricultural cycle. Aside from the urban middle class the biggest driver of gold purchasing power in India has traditionally come from their farmers putting the surplus from their harvest into gold. I think we can score the impact on gold demand from the urban middle classes in India and China as one all – a point each. Therefore I would suggest they cancel out in this analysis.

Sometimes we Westerners forget how huge the difference is between gross national income (GNI) per capita in China, India and the Western un-developing countries. This link will take you to a World Bank comparison table. In 2010 the adjusted US dollar equivalent figure for China was $4,260 pa. In India it was $1,340 pa. Compare that to America sitting at $47,140, the UK at $38,540 and the larger EU countries averaging somewhere around the high thirties to early forties.

The point I want to make is that the direction of the flow of gold is not merely a question of raw purchasing power. If that were the case all of the flow would be Westward. The key drivers (at present) are cultural, aggregate purchasing power and accessibility. If you look at the figures in that World Bank table you can see that India has been punching well above its weight compared to China in the gold purchasing “competition”. The only reason I can think of to explain the difference is that the collective purchasing power of the rural population in India is able to bid for gold whereas China’s rural population has been largely excluded.

Going 'live' this month is a 10oz Gold mini-contract for the domestic Chinese retail market, up to now restricted to physical purchases. This alone looks to be a very exciting development on the demand side of the Precious Metals equation, especially as the 230 million customers of Agricultural Bank of China are plugged into the exchange platform from the off. This domestic contract should be fully operational this month (July).

Now a 10 ounce mini-contract isn’t going to unleash the aggregate purchasing power of rural China on the gold market (given their GNI per capita). But remember that China relaxed the laws on gold sales and ownership in two stages. In stage one the amounts allowed to be sold were too large to cater to the average middle class citizen. In stage two the option of purchasing gold and silver was provided to most of their middle class citizens.

So in closing I would like to leave you with a final thought. Let’s assume there is a “stage two” in the pipeline for the PAGE retail contract rollout, or an Ag Bank of China product based on it, which allows the Chinese rural population to easily and conveniently save in gold. What does a GNI in China three times as high as India’s portend for competition between them for the flow of gold?

I find the India/China story to be, at least in MSM, the least reported and under appreciated aspect of gold bullion demand. I know that this blog is primaily focused on "giants", but the growing middle class of those two countries aggregates to a couple of " giants" in their own right. Then add in all the other EM middle class who don't want to entrust all of their savings to local currency and certainly not USD to the same extent anymore (and forget euros - no one outside of Europe saves in euros).

If they want gold, the price is going higher, no matter what the western governments do.

Is there any way to get our arms around the size of the total purchasing power of the Chinese that are actually likely to participate in the exchange? My earlier post alluded to that question, i.e.. are there really enough players in China to make the exchange a factor in world markets? I say "in China" because it still seems like they will have a tough time attracting a great deal of foreign investment, given their history and political structure.

I only wish someone would open a similar physical only exchange in the US, so we could hear the sucking sound.

"I only wish someone would open a similar physical only exchange in the US"

Fortunately for those of us (me) in the USA we eventually will see this come to pass. Unfortunately for the same we may be last to do so. I hope this is not the case as I myself would prefer to be spared intense hyperinflation, but rest assured when this exchange network finally goes full blown -- you will know your front clerk's name and probably be invited for dinner. ;-)

Inertia for the USD is a *****, but fortunately for PGAs inertia for RPG is also a *****.

South Korea's central bank bought 25 tonnes of gold over the past two months in its first purchase in more than a decade, saying the time was ripe to boost its gold holding, but markets barely moved on the news.

and

The BoK declined to disclose the purchase price but said it had entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions in future.

Interpretation? Unallocated and the BoE is the questionable counterparty?

Is there any way to get our arms around the size of the total purchasing power of the Chinese that are actually likely to participate in the exchange?

On the retail level it depends what the Chinese banks have in mind - particularly the Agricultural Bank of China. Up till now their gold bullion sales were subject to the same logistical issues that plague any physical product. Now their "inventory" is only limited by the amount of gold at the PAGE. They can sell a gram of gold and then lock in the bullion via PAGE instantly. They don’t need to wait for stock to arrive before they can transact with customers.

How big could this be? As I said in an earlier comment let’s assume the urban middle classes in India and China have roughly similar gold purchasing power. So we credit China’s rise to the number 2 position (20%) in the purchasing table of the annual flow to their urbanites. India is at 32%. Of course this is very crude but let’s assume that the difference (12%) is rural money in India.

I’m assuming the reason for giving the Ag Bank of China such a central role in this initiative is that Beijing wants to make gold readily available to their rural population. GNI per capita in China is 3:1 India. Assuming the rural population in China is about the same size as India (but wealthier) then I don’t see why PAGE cannot capture 12-20 per cent of the annual flow of gold just on rural retail customers alone. If the physical gold trade in China migrates from other exchanges to PAGE then it could have 32-40 per cent of the annual flow. Direct importers might also migrate to PAGE if it demonstrates superior liquidity and safety (compared to the LBMA for example).

You wrote:I say "in China" because it still seems like they will have a tough time attracting a great deal of foreign investment, given their history and political structure.

FOFOA, let’s ask Bron Suchecki. If the Perth Mint likes the offering then it should be a cause for optimism about the prospects for PAGE. IMO Joel we should also wait to see if other investment managers take the same attitude as Ned Naylor-Leyland before we assume non-Chinese companies wont use PAGE.

So the question is more Does the average Indian or Chinese believe gold has a "limit price"?

What does their gold purchasing pattern from the last decade tell us about India? Their average annual spend in rupees (not weight) has been consistent regardless of price. FWIW I think the Chinese market will demonstrate the same behaviour.

Changing topics, what are your thoughts on the impact of margin in a physical only market?

As more information comes to hand we should have a clearer picture of the attitude to margin at the PAGE. In my opinion there should be no margin or leverage in trading contracts on an allocated exchange such as PAGE. Fully allocated physical metal and 100 per cent cash from the other side of a contract. If a trader uses a line of credit raised off-exchange to put up the cash then that is a private contract between the lender and the borrower, not the PAGE.

In that interview with Max Keiser NNL remarked that the Hong Kong exchange was a paper market like the Comex and part of the same trading regime. A damp “squib” (firecracker) in terms of impact on the market. You might not be far from the truth if you looked upon the HK exchange as a fact finding mission for Beijing – “If you know your enemy and know yourself, you need not fear the result of a hundred battles.” – Sun Tzu

If PAGE trades only allocated gold as it appears it will, then it is a physical gold price discovery market.

This is the function of importance.

Currently the “gold price” is discovered via a paper gold price discovery market. This is fine if you are trading paper, as you know the current market price, but you don’t have to trade your paper on that exchange.

Any paper (or physical) gold transaction you currently engage in is benchmarked via the COMEX/LMBA price discovery market, but you are not confined to these exchanges, are you?

The entire public gold market simply uses this price as a reference point.

If PAGE trades only allocated gold (I agree with Costata that all transactions on such an exchange should be unleveraged) then it has established a reference point for physical gold undiluted by fractionalized paper claims, and this price becomes the benchmark for physical gold transactions, for example at your local coin shop, bank, ebay, gold ATM, wherever you can access physical.

The volume of gold traded on such an exchange is not relevant; the value it establishes for physical gold is. Remember, as the price of gold rises the flow dries up. The weight of gold changing hands is diminished, while the value increases.

Gold flows to where it is valued. If you sell some, you sell because you value something else higher.

If PAGE establishes a higher value for gold, gold will flow there, where higher prices are paid for it. But the same price or higher will also be paid everywhere else to purchase physical too.

The physical gold you hold will rise in value simultaneously.

Paper gold will continue to be valued by the current price discovery market. Physical and paper will diverge.

You don’t need to trade your gold on COMEX now to have that market establish the value of your gold (whether paper or physical) for you, just as you wouldn’t need to trade on a fully allocated exchange to have it value your (unleveraged allocated/physical) either.

Why would you need a physical only exchange in your country of residence? As long as one is operating somewhere the physical only price is being discovered. This is the only important factor. All physical is revalued, wherever the exchange is.

The launch of any fully allocated exchange should have the same effect... if there is a demand for physical over paper then the spread should widen, and as the spread widens so the demand for physical grows. The presence of such an exchange would have made a world of difference back in Sept '08.

"The presence of such an exchange would have made a world of difference back in Sept '08."

I'm sure that's true, but, equally, there may not have been an '08 were different mechanisms in place, and it also occurs to me that '08, and all that it ushered in, needed to happen to give birth to the PAGE.

Michael here...for some reason I cannot post as aynthing other than "Unknown"...signed out and back in to no use...So the response to the great 'deal' is in DOW down 222 and gold up more than I've seen it go up in a day...Not to be trivial but this feels significant.

As I sprint the Gold Trail trying to catch up to the pack I'm going to ask: is it worth reading about Real Bills?These are mentioned in comments on this blog and I've seen them referred to elsewhere. I'd rather go back over and spend my reading time on FOA and earlier FOFOA. Is this an important subject? I have read (and forgotten where) the Fed once was based on some consideration of Real Bills. Just a quick hell no (or yes) would be fine.

Momentous day in gold. Up approx. $40. Dow down over 260. An awful Debt Ceiling Deal (euww...). Great for gold, but a BAD day for the USA.

FOFOA (of course, duh!) is completely correct. Buy as much physical gold as you can afford, so that you do not have to sell it prematurely if you run short of fiats. Fiats have their role, I completely agree. You NEED to pay your bills!

Gold... It looks like it is getting some attention. CNBC was showing price of Au all day long, even if they weren't (I was away at at work so do not KNOW) TALKING about it...

Looks like the Gold Train is picking up speed. I do not know, but there could be shortages coming soon to physical gold providers.

Buy gold! And (in my case), NEVER sell... GIVE it away to someone you love.

So Ive been trying to figure out how to buy gold in smaller and smaller amounts. As I see this being the biggest issue of freegold at the moment.

Im finding basically nothing. Some tiny gold nuggets on ebay and scrap gold from sim cards. If gold can hold infinate wealth, then at todays prices we are going to have to start seeing very small flakes being sold in certain markets. Obviously, the western market is still selling their cash4gold scraps and not buying and holding yet.

How are people supposed to get their hands on gold, when 1g is selling for $100? Plus the average peoples fiat is being squeezed out of them faster and faster through inflation and job loss, so they wont have any fiat to buy small amounts with anyway in the future.

MF thanks...it sounded pretty drool anyway...Much more fun watching gold move up overnight. I am aware it is likely to crash and not mean much to those who have physical but it pleasant to have it be high.a Thought.... If it does come down hard that would be a good time to move physical from an IRA to a Roth IRA.

interesting. It almost seems as if this forum is frequented exclusively by millionaires and billionaires. :-)

Dunno about you but at the end of the month I often have around $100 to save (and sometimes much less)... so I wouldn't find Kicker's question that irrelevant.

Point is, if you really want RPG then anyone, anywhere should be able to obtain physical, no? And it really doesn't matter whether you want to buy physical for a single $1/$10/$100 bill or for $1,000,000.

After the Freegold transition, when the real value of gold is known, and fiat fluctuates in value relative to gold, there's still nothing to stop you from keeping your savings in fiat if you want to, or if you "can't afford" to buy gold (though I think there will be ways). Once you accumulate enough fiat that it seems reasonable to convert it to gold, then you do so... simple.

@Michael, here are some previous comments on Fekete's "real bills""Introduction of real bills would require an active approach to re-monetize gold, whereas Freegold only requires passive patience until Gold is fully de-monetized.There are inherent contradictions in attempting to make gold fulfill the dual roles of store of value and medium of exchange"http://fofoa.blogspot.com/2009/11/money-talk-continued.htmlhttp://fofoa.blogspot.com/2010/12/value-of-gold.html?showComment=1291461170647#c6968833014166155934 and neighbouring comments.

Scotia bank Edmonton was out of 5 oz bars last time I was there and Toronto was out of 10's. One thing I noticed in dealing with this bullion bank is that they don't answer questions about inventory. If you ask, they will not tell you. You make an order and you find out of they have it.

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